Business Context and Reporting Period
Company: Schlumberger Limited (SLB)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Schlumberger is the world's leading oilfield services company, operating in approximately 80 countries with roughly 70,000 employees. The company is organized into two primary segments: Schlumberger Oilfield Services (providing technology and project management for the oil and gas lifecycle) and WesternGeco (the world's largest surface seismic company). The company's functional currency is the US dollar, though approximately 72% of revenue is derived from non-US operations.
Key Financial Metrics
| Metric (in millions, except per share) | 2006 | 2005 |
|---|---|---|
| Total Operating Revenue | $19,230 | $14,309 |
| Net Income | $3,710 | $2,207 |
| Diluted Earnings Per Share | $3.01 | $1.82 |
| Operating Cash Flow | $4,781 | $3,004 |
| Capital Expenditures | $2,637 | $1,652 |
| Net Debt | $2,834 | $532 |
| Working Capital | $2,731 | $3,121 |
| Stockholders' Equity | $10,420 | $7,592 |
Note: Net Debt is defined as gross debt less cash, short-term investments, and fixed income investments held to maturity.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 34% to $19.23 billion, driven by significant price increases, deployment of new technologies, and stronger activity across all GeoMarkets.
- Oilfield Services: Revenue rose 33% to $16.77 billion. Pretax segment income grew 64% to $4.60 billion, with operating margins reaching a record 27.5%.
- WesternGeco: Revenue surged 49% to $2.47 billion. Pretax segment income increased 170% to $853 million, fueled by the resurgence of exploration activity and the adoption of Q-Technology.
- Profitability: Net income increased 68% to $3.71 billion. The effective tax rate was 24.0% in 2006 compared to 22.9% in 2005.
- Acquisitions: Schlumberger acquired the remaining 30% minority interest in WesternGeco from Baker Hughes for $2.4 billion in cash, resulting in 100% ownership. Additionally, the company completed the acquisition of the remaining 49% of PetroAlliance Services in Russia.
- Debt Position: Net debt increased significantly from $532 million in 2005 to $2.83 billion in 2006, primarily due to the $2.4 billion cash payment for the WesternGeco acquisition and increased capital expenditures.
Guidance, Outlook, and Risks
Management Commentary & Outlook: Management views the period of "cheap hydrocarbon energy" as ended, anticipating sustained higher investment levels in exploration and production to meet global demand. The company expects industry spending to increase for several years. Schlumberger highlighted strong growth in emerging regions including West and South Africa, Nigeria, Algeria, Libya, Saudi Arabia, Qatar, India, and China. The company also noted a shift toward exploration within known fields to access bypassed oil accumulations.
Dividends and Buybacks: On January 18, 2007, the Board approved a 40% increase in the quarterly dividend to $0.175 per share, effective April 6, 2007. The company also maintained an active share repurchase program, having repurchased approximately 13.6 million shares under a 40 million share authorization as of year-end.
Risks and Contingencies:
- Commodity Prices: Demand is highly sensitive to oil and gas prices. A substantial decline could reduce customer expenditures.
- Geopolitical Risks: With 72% of revenue from non-US operations, the company faces risks related to political instability, expropriation, and sanctions in countries such as Iran, Syria, Sudan, and Cuba.
- Legal Proceedings: In June 2006, WesternGeco settled a federal investigation regarding visa violations for crewmembers on Gulf of Mexico vessels, agreeing to pay an $18 million penalty and $1.6 million in investigation expenses. A deferred prosecution agreement was entered into.
- Environmental Liabilities: The company faces potential liabilities for remediation of contaminated properties and strict liability for damages to natural resources.
Investor Verification Checklist
- WesternGeco Integration: Verify the realization of synergies and the impact of the $2.4 billion acquisition on future cash flows and amortization expenses (specifically the reset of the multiclient seismic data amortization period).
- Oil Price Sensitivity: Monitor global oil and gas prices to assess the sustainability of the 34% revenue growth, given the company's exposure to industry capital expenditures.
- Debt Servicing: Review the company's ability to service the increased net debt load ($2.83 billion) amidst potential fluctuations in commodity prices.
- Geopolitical Exposure: Assess the impact of political instability in key growth regions (e.g., Russia, Middle East, Latin America) on revenue recognition and asset safety.
- Regulatory Compliance: Track the status of the WesternGeco deferred prosecution agreement and any future environmental or legal liabilities.